Despite Austria's first bond PPP financing – Ostregion Phase 1 – having closed in late December, and its first significant PPP project having closed three years ago, the Austrian PPP market has been slow to take off and many sponsors are frustrated by the lack of deal flow.

"There has been a lack of political will for PPPs on the part of ASFINAG [the state-owned motorway operator] but also the Austrian government, even though deals have been closed in neighbouring jurisdictions such as Hungary. You have to remember that many of the big players in Austria, such as Strabag, Alpine Mayreder and PORR, have closed PPPs elsewhere, so it's not like they don't have the know-how," says Karl Pfeffer, global head of corporate, structured and project finance at PORR AG.

Others are more sceptical. "Within ASFINAG I would think that the majority don't like the concept of PPPs. You have to remember that they have more control; they have their own construction workers and their own building department. This government doesn't look like it will further PPPs," adds another Austrian source.

But like many European states, low GDP growth, coupled with a need for tighter fiscal discipline, mean that the Austrian government may have little choice but to implement more PPPs for its future infrastructure needs.

Too much complication

Austria's first major foray into the PPP market was unnecessarily complicated. Financing for the Eu230 million Autostrade-sponsored Europpass LKW-Mautsystem (the world's first automated non-stop national HGV tolling system), while unexpectedly cheap, was not bank friendly. ASFINAG (or Autobahnen- und Schnellstrassen-Finanzierungs-Aktiengesellschaft, in full), demanded step-in rights. This meant that the project had to be structured in such a way as to maintain limited recourse financing, even if ASFINAG were to exercise its rights. The debt could then be transferred simultaneously to a new borrower (ASFINAG or a third party nominated by the operator) and the debt from Europpass would be extinguished in order to trigger payment of compensation under the operating agreement without the lenders having to go to the sponsors.

Despite the a number of complications – especially the amount of legal work generated by ASFINAG's insistence on step-in rights – the deal was praised for being the first electronic toll collection PPP to get off the ground in Europe. There was, however, some speculation that the deal might have put funders off future projects in the jurisdiction.

Fortunately, this has not been the case. In December 2006, ASFINAG closed the A5 PPP Ostregion Package 1. The deal – the first privately financed PPP road project in Austria – is the first of four toll road projects for ASFINAG. Moreover, success in the road sector could translate into a spate of deals across various sectors. Despite Austria's paucity of PPP projects, the mood in certain quarters remains quietly optimistic.

"In comparison with other European jurisdictions, I am not sure one can say that Austria lags behind, or is any better or worse at getting PPP deals closed," says Ian Andrews, projects partner at Linklaters, who has advised on both the completed deals in Austria (Ostregion and Europpass).

Not everyone agrees. "The deal [Ostregion] may have closed successfully, but it was a long time in the making. I'm not so sure whether Austria is the right jurisdiction to close PPPs; I know that there has been some resistance to these deals at a governmental and governmental-agency level. Let's put it this way, it wouldn't surprise me if the other road tranches are not closed on a PPP basis for ASFINAG. And if these deals aren't done, then I don't know who will do PPPs," says a Vienna-based project financier.

Ostregion PPP

ASFINAG has implemented Ostregion in order to ameliorate the poor road network surrounding Vienna, and link the capital with neighbouring Czech Republic and Slovakia. The scheme will add 134km of new road to the existing motorway network in eastern Austria. Too large to structure as one deal, the motorway operator decided to split the project into four separate tranches. It is currently estimated that the total project will come in at Eu3.1 billion ($4 billion), though a figure around Eu3.5 billion is more likely.

Originally tendered in 2005, the Bonaventura consortium – led by Hochtief PPP Solutions (44.4%) and comprising Alpine Mayreder Bau (44.4%) and Egis projects (11.2%) – signed the contract to design, build, finance and operate (DBFO) Package 1 (or Ypsilon) in December of last year. The 30-year concession, which comprises a 51km motorway stretch on the S1 and S2 (north-east of Vienna) and on the A5 corridor (between Vienna and the border of the Czech Republic), will start this month and should be completed by the end of the decade under a lump-sum, fixed-price turnkey contract. The motorway will be constructed in four separate sections and will include 98 bridges, four tunnels and a number of supporting structures.

The Eu977.7 million deal is part financed by Austria's first PPP bond, to the tune of Eu425 million. Issued by SPV Ostregion Investmentgesellschaft Nr 1 SA, Deutsche Bank – which also acted as financial advisor – brought the variable funding note to market in early January. The bonds, which are wrapped by Ambac, have been given a triple-A rating by Standard and Poor's.

The financing structure also includes a Eu350 million loan from the European Investment Bank (EIB), together with the provision of mezzanine capital from Deutsche Asset Management, RREEF Infrastructure and Meridiam Infrastructure. Pricing on the deal is rumoured to be around 50bp.

With the concession contract slated to expire in 2039, the tenor will be 32 years. Over the three-year construction period the debt will be drawn down when needed. Based closely on the UK's design-build-finance-operate (DBFO) structure, the concessionaire will receive milestone payments during construction phase as and when it completes sections of the project. These revenues will be backed by quality-dependent payments governed by the highway's availability and from traffic-related shadow toll revenues.

Given the low exposure to traffic risk – due to the structuring of a debt service guarantee by the motorway operator – availability payments will be between 65% and 70% of the base case revenues, although some experts expect them to exceed 75%. Should traffic fall below a worst-case threshold, whereby the debt service coverage ratio drops below 1.05x, then the motorway operator will cover the balance. ASFINAG will make direct payments for those parts of the project, such as minor roads, which are constructed but not operated by the concessionaire.

Even though the deal reached successful close, there was an eleventh-hour dispute when rival bidding consortium Akor (Porr/Strabag/Raiffeisen/Bank Austria) disputed the award of the concession to Bonaventura. In the end, the appeal was withdrawn.

"The deal may have taken a long time to close, since Austrian procurement law doesn't make life easier for any of the parties. Nevertheless, ASFINAG made significant savings in comparison with traditional procurement," adds Andrews.

Unfortunately, having set a precedent, it looks likely that appeals against the awarding of a concession will become part of the bidding process of deals in the future. "Consortia do not want to spend several millions on the bidding process and get nothing out of it. So they might as well go for a procurement challenge, in that it may only cost a few thousand Euros, and the decision may be overturned. The legislation needs to be looked at closely. Maybe the state should start to consider paying part of the bidding costs," says an industry source.
The rest of the scheme is expected to be tendered later this year and early in 2008, though what form the financing takes remains to be seen.

"In the case of the Ostregion deal, the market was willing to accept certain specific features applied to the concession. It can be expected that subsequent road packages will start from a similar successful template. Now the first deal has been done, we might well see more aggressive models being applied to the sector. Certain stretches will probably lend themselves better to transferring risk than others," Says Rudi Asselberghs, senior loan officer, Austria, at the EIB.

Package 2 (A5 North) is a 66km stretch cross-border project that includes a connection to Pohorelice in the Czech Republic. The deal, which was tendered last year, is expected to come in at some Eu360 million. The largest tranche of the Ostregion PPP scheme is Package 3 (Olhafen), expected to be Eu1.37 billion, for a 20km stretch of the S1 Lobau and the S1 Danube crossings. Operation S1 South and Operation A4 (the latter, running to Schwechat) may be included in this trache. The final tranche – Package 4 (A22) will extend the A22 and Danube crossing to the A4, which will be widened. This smaller stretch of 7km is valued at Eu610 million. Packages 3 and 4 are expected to be tendered later this year, if not in 2008.

Rail PPPs

Apart from the road sector, the only other sector likely to deliver substantial PPP projects in the medium term is rail – although deals have been extremely slow in coming to market. The state-owned SCHIG mbH (Schieneninfrastruktur Dienstleistungsgesellschaft), which was established under the Railway Infrastructure Financing Act in 1997, has implemented a range of smaller PPPs for cargo terminals and wind tunnels. These include a Eu110 million project for a cargo terminal at Werndorf, which became operational in 2003.

Nevertheless, there are two large potential rail PPP deals on the way. The first is to enhance capacity for commuters and freight on the Phyrn-axis (Summerau-Spielfeld-Strass). Construction costs for the project are estimated at Eu940 million. The second is for the Brenner Basistunnel, one of the 30 priority projects of the Trans-European Transport Network (TEN's programme), which will link Innsbruck to Fortezza and will form an integral part of the Brenner rail axis from Munich to Verona.

Estimated at a cost of Eu6 billion, the tunnel will run for 55km, of which 31km will be in Austria. Austria and Italy have agreed that the tunnel will be open by 2015. KPMG is lead consultant on the project and Freshfields Bruckhaus Deringer is legal counsel, with finance and business management consulting from Bank Austria Creditanstalt, Unicredit Infrastrutture and Euregio Finance.

In order to further PPPs, there have been calls to establish a governmental taskforce to look at social infrastructure such as prisons, hospital and schools. But such a taskforce, similar to those established in Germany, would only be worthwhile if PPPs are closed across a number of sectors, and not only by ASFINAG.

According to Pfeffer, "If you look at other potential sectors, such as rail, you've got to ask how much in the way of subsidies will be available. Or if you analyse the complexity of the funding of the Austrian healthcare system, you can easily understand that hospital deals with a real PPP structure are almost impossible. PPPs are happening but the small deal sizes do not attract international attention."

Many observers still believe that without a solid political will it is unlikely that the Ostregion scheme, let alone a PPP market, will progress. "In future, PPP deals will need to be closed more quickly. Certain investors are saying that they can get similar returns elsewhere in a fraction of the time. There is an assumption by the public sector – and this does not solely apply to Austria – that the private sector will come running to projects," adds Andrews.